If a picture is worth a thousand words, this ought to be a short article. Take in, if you please, Figure 1. It’s a head-to-head comparison of the bullishness embedded in gold (red line) and S&P 500 (black line) options. The chart traces the skew in the volatility assumptions of puts and calls for each market over the past 18 months.

See the pricing bias? It’s been growing more bullish for stocks but more bearish for the yellow metal. That’s a seminal change in investment outlook, at least for gold. Remember, options are priced on the basis of expected volatility (the contracts analyzed here have three months ‘til expiry). Premiums reflect the fee demanded by sellers for undertaking performance risk. Naked call writers, for example -- a lot best described as neutral to modestly bearish -- will insist on higher premiums whenever near-term prospects turn bullish, making it more likely that they might actually have to deliver assets.

The shift in market tectonics is reflected in recent exchange-traded product offerings. When gold was still headed toward its $1,921 peak, FactorShares 2X: Gold Bull/S&P 500 Bear ETF (NYSEARCA:FSG) was launched (and profiled in “How To Spread Out In The ETF Market.”

FSG tracks the spread, or difference in daily returns, between gold and U.S. equities through leveraged positions in futures -- long for gold and short for the Standard & Poor’s 500 index. FSG targets a 200 percent return on the spread. FSG delivered a handsome 13.4 percent return by the end of its first year. At one point, in fact, FSG had more than doubled its starting value. Chalk that up, in large part, to the low correlation (0.02) between the S&P 500 and Comex spot gold.

Things have now turned sour for the ETF, though. As it heads toward its second anniversary, FSG is down 36.6 percent on the year. And that metal-equity correlation? It’s climbed to 0.28 (see Figure 2).

The shift in gold’s fortunes hasn’t gone unnoticed by exchange-traded product sponsors. Sure, short gold funds and notes have been around for a while, but issuers are now offering more nuanced exposures.

Unlike most ETNs, GLDI offers investors a monthly, albeit variable, cash flow from the nominal options sales and, to boot, a modest reduction -- that three percent again -- in the risk associated with a long GLD position. The tradeoff? A give-up of any GLD gains beyond the monthly overwrite.

The covered call position emulated by GLDI affords investors a reward-to-risk profile equivalent to that of short GLD puts, meaning there’s a limited profit to be made if gold rises or remains flat and a substantial loss potential if bullion declines.

More important perhaps is the complementary position undertaken by Credit Suisse. By issuing GLDI notes, the bank’s functionally long GLD puts -- a decidedly bearish position, though one with limited risk in the event of an upward spike in gold. That’s telling.

Credit Suisse is, in fact, banking (yeah, I know; a pun) on a weak metal market. No stranger to gold’s vagaries, Credit Suisse has likely read the slowdown in long speculative momentum signaled by Comex trader commitments. Figure 3 illustrates a dichotomy between indexed gold prices and the momentum in net speculative length. Notice that even as gold’s value spiked in the summer of 2011, the force driving speculative long positions was waning. Even now, as gold’s eased, bullion is 19 percent higher than two years ago. Speculative momentum, though, has slowed by ten percent.

Credit Suisse can hedge away any excess risk associated with its virtual put ownership but that gamble is already self-limited and further hedged by its cash receipts at the notes’ issuance. Conversely, GLDI holders are fully exposed (or nearly so) to a decline in gold prices. There’s an extraneous hazard, too, for GLDI buyers -- credit risk. If Credit Suisse slips into bankruptcy, holders of the ETNs could be wiped out.

The interests of Credit Suisse, to be sure, conflict with that of GLDI investors. That’s no secret. The bank’s disclosure documents explicitly warns buyers: “[T]he the economic interests of the calculation agent, index sponsor, and other affiliates of ours are potentially adverse to your interests as an investor in the GLDI ETNs.”

Gold’s Run Over?

Still, investors and market watchers were surprised when Credit Suisse published a bombshell report titled “Gold: The Beginning Of The End Of An Era.” The report released in February and authored by analysts Tom Kendall and Ric Deverell, contends that gold’s 2011 peak was a market top signaling the demise of a 12-year bull run.

Boy, how’s that for timing?

Two arguments are laid out in the Credit Suisse report. The first asserts that interest rates are normalizing after falling to historically low levels last year. Investors, say the analysts, are now less likely to seek safe haven in U.S. Treasury paper as the economy, most particularly the American housing market, improves. Further, aggressive moves from the European Central bank are easing Continental fears about the euro.

Historically, gold’s prospects brighten in a low-rate environment, but now that real interest rates are turning up, the curtain’s coming down on the economic crisis, so there’s less need for hedges against collapse or outsized volatility.

Kendall and Deverell then argue that bullion’s price has simply gone too far north (much like the assertion made by Yoni Jacobs in “All That Glitters May Not Glitter For Long.” “Against any sensible benchmark, gold still appears significantly overvalued,” the bankers declare. “It looks increasingly likely that [its] 2011 high will prove to have been the peak for the gold price in this cycle.”

The yellow metal is far above its long-term average price, the report’s authors say. “In trend terms, gold has never been this high for this long.” Especially against other physical assets like real estate, they contend that gold has gone to unprecedented extremes.

Inflation Won’t Save Gold Bugs

Gold is often touted as an inflation hedge, but an increase in the inflation rate may be slow in coming, according to Kendall and Deverell. “It remains highly improbable that inflation will become a major concern in the next year or two,” they say. “The greater risk is that gold will weaken substantially as economic data improve long before inflation expectations move significantly higher.”

Neither, say the analysts, is it likely that inflationary expectations will put a bid under gold’s price. Statistically, there’s little evidence of a relationship between bullion’s price and year-ahead inflation expectations over the past 25 years.

And The Other Banks?

Credit Suisse isn’t the only financial institution with qualms about gold’s trajectory. Publicly, big banks may still be bullish on gold, but they’re lowering their price targets for 2013.

In February, French bank BNP Paribas became the latest money center institution to cut its forecast. Goldman Sachs led the way in December by scaling back its 2013 prediction, after which analysts at Morgan Stanley, Citigroup, Deutsche Bank and HSBC slashed their estimations.

Still, no other bank has gone public with a forecast like the Credit Suisse report. Notably, the Swiss bank’s analysts don’t foresee a “collapse in the gold price,” but rather a “slow slide.” Could that also mean a slow death for GLDI investors?

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